Design-Build Contracts: The Latest in Project Delivery Methods

In the traditional design-bid-build context, the owner provides a contractor with a set of design specifications that “set forth in precise detail the materials to be employed and the manner in which the work is to be performed … provid[ing] no discretion to the contractor….”[i]  The owner contracts with a separate design professional for the designs.  Thus, the liabilities for the success of the project are spread between the contractor and designer.  However, over the last twenty-five years, a new project delivery method has emerged that centralizes liability in one entity and is rapidly increasing in popularity:  Design-Build.

A design-build contract is one undertaken by a contractor who provides both the design and the construction services for a project.  In the design-build approach, because the owner contracts with only one entity, there is only one point of liability for the owner if the project is unsuccessful.  Such consolidation of liability helps to reduce or prevent litigation involving multiple parties.  It is also beneficial to the contractor because it allows for flexibility and innovation without the rigidity of design specifics.  Thus, the design-builder is given performance specifications that “set forth an objective or standard to be achieved … and is expected to exercise his ingenuity in achieving that standard of performance, selecting the means and assuming a corresponding responsibility for that performance.”[ii]

However, because many owners do not want to relinquish total control to the design-builder, many contracts contain hybrid specifications (both performance and design) that results in an imprecise allocation of liability.  As mentioned above, when the specifications are performance related, the design-builder assumes responsibility for the project’s success.  Conversely, if the specification is design related, the liability then shifts back to the owner who impliedly warrants that the design is suitable for its intended purpose.[iii]  This warranty is commonly known as the Spearin doctrine.  Unfortunately, in practice, drawing the distinction between design specifications and performance specifications is neither clear nor absolute.[iv]

When courts are tasked with determining who is liable in a design-build contract dispute, the inquiry begins with determining the nature of the disputed specification.  In doing so, courts give little weight to the fact the contract is “design-build” and little weight to any labeling in the contract of a specification as one or the other.  The touchstone for assessing attendant liability is the amount of discretion granted.  “[I]t is the obligation imposed by the specification which determines the extent to which it is a ‘performance’ or ‘design,’ and not the other way around.”[v]  Thus, the language of the contract and the intent of the parties at the time of contracting will determine what type of specification is at issue and who is ultimately liable in the event of its shortcoming.

When interpreting a contract to determine party intent, Courts must accept the plain meaning of language that is unambiguous (i.e. there is only one reasonable interpretation).[vi]  Conversely, language is ambiguous when more than one reasonable interpretation is consistent with the language.  When an ambiguity is obvious, the contractor must seek clarification from the owner prior to bidding.[vii]  Ambiguities, however, are not always obvious.  In such cases, the courts will only ask if the contractor’s interpretation was reasonable.[viii]  “A contractor does not bear the burden of interpreting [the] contract [documents] correctly, only of interpreting [them] reasonably.”[ix]  This standard generally favors the contractor allowing for the recovery of costs incurred by a change later ordered by the owner due to latent ambiguities.

There are many other changes that will occur as the project progresses that are not necessarily due to ambiguous language, but simply due to the nature of the design-build process.  The designer and the builder are working as a team.  Therefore, the construction can proceed as portions of the design are completed incrementally knowing that the chances of significant changes are limited due to the amount of control the design-builder is intended to retain.  The changes that should occur are those within the scope of the work that are anticipated by the design-builder, which do not substantially affect the project cost or progression.  As the project moves forward, however, owners often make changes to certain aspects of the design that result in increased costs not anticipated by the design-builder at the time of bidding.  These unanticipated changes often result in litigation to determine whether the change was so substantial as to render it not within the scope of the work contracted for and, thus, compensable.

Determining the “scope” of a project is a fact-intensive inquiry, and there is not a bright line rule that will be applied.  From the owner’s perspective, the nature of the design-build process anticipates changes because of the incomplete nature of the design at the time of bidding.  Thus, the costs of changes are within scope and should be absorbed by the design-builder.  From the design-builder’s perspective, the changes anticipated are those it chooses to make along the way that are necessary to achieve the project’s intended purpose while also maintaining the anticipated costs.  The design-builder anticipates having discretion to choose the means and methods used to meet its contractual obligations.  Owner-caused changes that are not necessary to meet the project’s intended purpose and that result in increased costs are not contemplated by the contract, are outside the project’s scope, and should be absorbed by the owner.

The design-build method has only recently increased in popularity.  Therefore, the law is still limited and varies greatly between jurisdictions.  This legal uncertainty is one of the risks of the design-build delivery method.  The fact that there is little legal authority addressing the issue, however, might indicate that its goal of reducing litigation has been successful.  Despite the additional liability assumed by the contractor, the design-build delivery method overall can be extremely beneficial and allow for a flexible project progression and ingenuity in determining what means and methods will meet the project’s purpose and generate the greatest revenue.

Comment:  At the time of contracting, the parties should be diligent in defining liability responsibility upfront, defining the amount of control that will be given to the design-builder and the amount which will be retained by the owner.  As previously mentioned, merely labeling a specification design or performance will not allow the owner or the contractor to avoid liability if the obligation that is actually imposed by the specification is the opposite of what it is labeled.  Contractors should read the request for proposal closely, seeking clarification of any possible ambiguities prior to accepting the project.  Diligence during the bidding and contracting stage is crucial to avoiding liability later for providing something different than the owner anticipated.

[i] Dillingham Const., N.A., Inc. v. U.S., 33 Fed.Cl. 495, 500-501 (1995).

[ii] Id. at 501. (emphasis added).

[iii] See U.S. v. Spearin, 54 Ct.Cl. 187 (1918).

[iv] See Fru-Con Const. Corp. v. U.S., 42 Fed.Cl. 94, 97 (1998).

[v] Id.

[vi] Conner Brothers Const. Co., Inc. v. U.S., 65 Fed.Cl. 657, 667 (2005).

[vii] Id. at 668.

[viii] Id.

[ix] Mega Const. Co. v. United States, 29 Fed. Cl. 396, 457 (1993).

Scroll to Top